Going From Renter to Owner: The Seven Things You Should Know Before Making the Transition to Homeownership

  1. Make sure you’re ready
    • Ask yourself a few questions before making the decision to own a home:
      • Is my job secure?—Taking on a huge debt might lead to financial trouble if you lose your job in a few months or years, especially if finding a new one requires relocating.
      • Do I plan to stay put?—I know I want to spend the rest of my life in my city. If I buy a house now, I won’t be selling it for a long time. But if you’re not sure where you’ll be five years from now, renting might make more sense. That’s because using a real estate agent to sell a house can cost 6% or more, and if you sell your home before you have that much equity, you’ll lose money.
      • Am I in a transition?—If you’re not changing towns, you might still need to change homes. Life changes like marriage and kids can require a different house.
  2. Know what you can afford
    • Your house payment, including the mortgage, real estate taxes, and homeowners insurance, shouldn’t exceed 28 percent of your monthly gross income. To determine the most you can afford each month, multiply your annual take-home pay by .28 and divide that number by 12.
  3. Shine up your credit
    • Lenders have strict credit requirements after the house market apocalypse. In 2011, the average credit score approved for a Fannie Mae or Freddie Mac mortgage was 760, according to CNNMoney. The average credit score for an FHA approval was 700. To qualify for the best conventional loan, you’ll need at least a 740 credit score, according to Bankrate.
  4. Get your down payment together
    • These days, many lenders want at least 20% down, but even if they don’t the bigger the down payment, the better. Zillow analyzed 3.6 million mortgage inquiries and found that the best loan rates came with an average down payment of 28%, according to USA Today. If you go with an FHA loan, you can qualify with a lower down payment, as low as 3.5% of the purchase price, according to HUD. But make sure you have it before you apply. Also, be aware that without 20% down, you’ll be faced with an extra expense: Private Mortgage Insurance, also known as PMI.
  5. Get pre-approved for a mortgage
    • Once your credit is good and you have your down payment together, it’s time to apply for a mortgage. Do it before you start home shopping and be sure you’re pre-approved for a loan: That means the lender has agreed in writing to lend you up to a certain amount. This is critical, because pre-approval means that unless your financial situation changes, you basically have that amount of money in your pocket and can ounce when you find your dream home.
  6. Build your team
    • Buying a house isn’t a solo project. You’ll need a good lender and a great real estate agent to get the best deal. Before you select a lender, try using the Nationwide Mortgage Licensing System and Registry to make sure they are licensed in your state, and check all reviews.
  7. Know your housing market
    • Find answers to the fowling questions. Some you can get by reading the local paper, some by contacting your local chamber of commerce, and some by talking to your real estate agent:
      • How long are houses sitting on the market?—Your agent can tell you the average number of days it’s taking to sell homes in the neighborhood you like. You’d like to see these numbers dropping.
      • Inventory—How many homes are available in the neighborhood? Again, you’d like to see falling numbers, because that indicates demand is gaining on supply.
      • The employment picture—Without jobs, there’s no need for houses. Is the unemployment rate falling?
      • Population growth—Population growth supplies the demand for housing. If you’re in an area with a shrinking population, that’s not a good sign.

*Article taken from moneytalksnews.com “Housing Has Bottomed–It’s Time to Buy.”

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